When the rights and obligations arising out of a contract are extinguished, the contract is said to be discharged or terminated. A contract may be discharged in any of the following ways:
1. By performance-actual or attempted.
2. By mutual consent or agreement.
ADVERTISEMENTS:
3. By subsequent or supervening impossibility or illegality.
4. By lapse of time.
5. By operation of law.
6. By breach of contract.
ADVERTISEMENTS:
1. Discharge by Performance
Performance of a contract is the principal and most usual mode of discharge of a contract. Performance may be: (1) Actual performance; or (2) Attempted performance or Tender.
1. Actual performance:
ADVERTISEMENTS:
When each party to a contract fulfils his obligation arising under the contract within the time and in the manner prescribed, it amounts to actual performance of the contract and the contract comes to an end or stands discharged.
But if one party only performs his promise, he alone is discharged. Such a party gets a right of action against the other party who is guilty of breach.
Image Source:metrotrains.com
2. Attempted performance or tender:
When the promisor offers to perform his obligation under the contract, but is unable to do so because the promisee does not accept the performance, it is called “attempted performance” or “tender.”
Thus “tender” is not actual performance but is only an “offer to perform” the obligation under the contract. A valid tender of performance is equivalent to performance.
Essentials of a valid tender:
A valid tender or offer of performance must fulfil the following conditions.
1. It must be unconditional:
A conditional tender is no tender. For example, A, who is a debtor of company B, offers to pay if shares are allotted to him at par. It is no tender.
2. It must be made at proper time and place:
A tender before or after the due date or at a place other than agreed upon is not a valid tender. For example, A is a tenant of B. He offers him rent at a marriage party. B is not bound to accept as the tender is not made at a proper place.
3. It must be of the whole obligation contracted for and not only of the part:
Thus deciding of his own to pay in instalments and offering the first instalment was held an invalid tender as it was not of the whole amount due. (Behari Lai vs Ram Gulam).
4. If the tender relates to delivery of goods:
It must give a reasonable opportunity to the promisee for inspection of goods so that he may be sure that the goods tendered are of contract description.
5. It must be made by a person who is in a position and is willing to perform the promise:
A tender by a minor or idiot is not a valid tender.
6. It must be made to the proper person, i.e., the promisee or his duly authorised agent:
Tender made to a stranger is invalid.
7. If there are several joint promisees:
An offer to any one of them is a valid tender. (But the actual payment must be made to all joint promisees, and not to any one of them, for a valid discharge of the contract, for, Section 45 provides that when a promise is made to two or more persons jointly, the right to claim performance rests with all of them jointly.)
8. In case of tender of money, exact amount should be tendered in the legal tender money:
Tendering a smaller or larger amount is an invalid tender, e.g., tendering Rs 100 currency note to a conductor of a bus for a two rupees ticket is not a valid tender. Similarly, a tender by a cheque is invalid as it is not legal tender but if the creditor accepts the cheque, he cannot afterwards raise an objection.
Effect of refusal to accept a valid tender (Sec 38):
The effect of refusal to accept a properly made “offer of performance” is that the contract is deemed to have been performed by the promisor, i.e., tenderer, and the promisee can be sued for breach of contract. A valid tender, thus, discharges the contract.
Exception:
Tender of money, however, does not discharge the contract. The money will have to be paid even after the refusal of tender, of course without interest from the date of refusal. In case of a suit, cost of defence can also be recovered from the plaintiff, if tender of money is proved. (Jagat Tarini vs Naba Gopal).
2. Discharge by Mutual Consent or Agreement:
Since a contract is created by means of an agreement, it may also be discharged by another agreement between the same parties. Sections 62 and 63 deal with this subject and provide for the following methods of discharging a contract by mutual agreement:
(i) Novation:
“Novation occurs when a new contract is substituted for an existing contract, either between the same parties or between different parties, the consideration mutually being the discharge of the old contract.
If parties are not changed then the nature of the obligation (i.e., material terms of the contract) must be altered substantially in the new substituted contract, for a mere variation of some of the terms of a contract, while the parties remain the same, is not “novation” but “alteration.” When the parties to a contract agree for “novation,” the original contract is discharged and need not be performed.
Illustrations:
(a) A is indebted to B and B to C. By mutual agreement B’s debt to C and B’s loan to A are cancelled and C accepts A as his debtor. There is novation involving change of parties.
(b) A owes B Rs 10,000. A enters into an agreement with B, and gives B a mortgage of his (A’s) estate for Rs 5,000 in place of the debt of Rs 10,000. This is a new- contract and extinguishes the old. [Illustration (b) to Section 62].
The following points are also worth noting in connection with novation:
(a) Novation cannot be compulsory; it can only be with the mutual consent of all the parties.
Illustration:
A owes B Rs 1,000 under a contract. B owes C Rs 1,000. B orders A to credit C with Rs 1,000 in his books, but C does not assent to the agreement. B still owes C Rs 1,000 and no new contract has been entered into. [Illustration (c) to Section 62].
(b) The new contract must be valid and enforceable. If it suffers from any legal flaw, e.g., want of proper stamp or registration etc., on account of which it becomes unenforceable, then the original contract revives. (Mahabir Prasad vs Satyanarain’).
(ii) Alteration:
Alteration of a contract means change in one or more of the material terms of a contract. If a material alteration in a written contract is done by mutual consent, the original contract is discharged by alteration and the new contract in its altered form takes its place.
A material alteration is one which alters the legal effect of the contract, e.g., a change in the amount of money to be paid or a change in the rate of interest. Immaterial alteration, e.g., correcting a clerical error in figures or the spelling of a name, has no effect on the validity of the contract and does not amount to alteration in the technical sense.
It is relevant to state that a material alteration made in a written contract by one party without the consent of the other, will, make the whole contract void and no person can maintain an action upon it. It comes under “discharge of a contract by operation of law” which will be discussed later.
The difference between “novation” and “alteration” may be noted. In case of novation there may be a change of parties also while in case of alteration parties remain the same, only the terms of a contract are altered.
(iii) Rescission:
A contract may be discharged, before the date of performance, by agreement between the parties to the effect that it shall no longer bind them.
Such an agreement amounts to “rescission” or cancellation of the contract, the consideration for mutual promises being the abandonment by the respective parties of their rights under the contract. An agreement of rescission releases the parties from their obligations arising out of the contract.
Illustration:
A promises to deliver certain goods to B on a certain date. Before the date of performance, A and B mutually agree that the contract will not be performed. The contract stands discharged by rescission.
There may also be an implied rescission of a contract, e.g., where there is non-performance of a contract by both the parties for a long period, without complaint, it amounts to an implied rescission.
Notice that in the case of rescission, the existing contract is cancelled by mutual consent without substituting a new contract in its place.
(iv) Remission:
Remission may be defined “as the acceptance of a lesser sum than what was contracted for or a lesser fulfilment of the promise made.”
Section 63 deals with remission of performance and lays down that a promisee may remit or give up wholly or in part, the performance of the promise made to him, and a promise to do so is binding even though there is no consideration for it.
The Section further provides that an agreement to extend the time for the performance of a promise also does not require consideration to support it on the ground that it is a partial remission of performance.
Illustrations:
(a) If the promisee agrees to accept Rs 2,000 in full satisfaction of a claim of Rs 5,000, the promise is enforceable and the promisee cannot in future bring a suit for the recovery of Rs 5,000.
(b) A owes B Rs 5,000. A pays to B and B accepts, in satisfaction of the whole debt, Rs 2,000 paid at the time and place at which the Rs 5,000 were payable. The whole debt is discharged [Illustration (b) to Section 63],
(c) A owes B Rs 5,000 payable on 1st June. A is not in a position to meet his liability on the due date and as such makes a request to B to extend the time for payment by three months. B accedes to A’s request. The promise is binding and no suit can be instituted before the expiry of the extended period of credit although the promise is not supported by any consideration.
(v) Waiver:
Waiver means the deliberate abandonment or giving up of a right which a party is entitled to under a contract, whereupon the other party to the contract is released from his obligation. Strictly speaking there is no need of an agreement for a waiver but because we are discussing it as a method of discharge under ‘mutual consent,’ we presume that the other party consents to it.
Thus, where A promises to tailor a shirt for B if he will sing a song at his birthday party and accordingly B sang the song but afterwards B forbids A to tailor the shirt, to which A consents, the contract is terminated by waiver.
3. Discharge by Subsequent or Supervening Impossibility or Illegality:
Impossibility at the time of contract:
There is no question of discharge of a contract which is entered into to perform something that is obviously impossible, e.g., an agreement to discover treasure by magic, because, in such a case there is no contract to terminate, it being an agreement void ab-initio by virtue of Section 56, Para I, which provides: “an agreement to do an act impossible in itself is void.”
Notice that this paragraph of the Section speaks of something which is impossible inherently or by its very nature and which may or may not be known to both the parties at the time when the contract is made.
But if the impossibility is not obvious and the promisor alone knows of the impossibility or illegality then existing or the promisor might have known as such after using reasonable diligence, such promisor is bound to compensate the promisee for any loss he may suffer through the non-performance of the promise, in spite of the agreement being void ab-initio [Section 56, Para 3].
Illustration:
A contract to marry B, being already married to C, and being forbidden by the law to which he is subject to practise polygamy. A must make compensation to B for the loss caused to her by the non-performance of his promise [Illustration (c) to Section 56].
Subsequent impossibility:
In fact it is this case, where the impossibility supervenes after the contract has been made, which is material to our study of discharge of contracts. In this connection, Section 56, Para 2, declares: “A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful”.
In order that the Section would apply the following conditions must be fulfilled: (1) that the act should have become impossible; (2) that impossibility should be by reason of some event which the promisor could not prevent; and (3) that the impossibility should not be self-induced by the promisor or due to his negligence.
Further, the word “impossible” should be construed here in its practical sense and not only in a physical or literal sense.
It is sufficient for the act to be impossible that it becomes impracticable or extremely hazardous or useless from the point of view of the object and purpose which the parties had in view, because if an untoward event or change of circumstances totally upsets the very foundation upon which the parties rested their bargain, it can very well be said that the promisor found it impossible to do the act which he promised to do.
Thus, under Section 56 (Para 2), where an event which could not reasonably have been in the contemplation of the parties when the contract was made, renders performance impossible or unlawful, the contract becomes void and stands discharged.
This is known as frustration of the contract brought about by supervening impossibility. It is also known as the doctrine of supervening impossibility.
The rationale behind the doctrine is that if the performance of a contract becomes impossible by reason of supervening impossibility or illegality of the act agreed to be done, it is logical to absolve the parties from further performance of it as they never did promise to perform impossibility.
It may be of interest to note that in the case of subsequent impossibility or illegality, the dissolution of the contract occurs automatically. It does not depend, as does “novation” or “remission” of a contract, on the choice of the parties. It depends on the effect of what has actually happened on the possibility of performing the contract.
Cases where the doctrine of supervening impossibility applies:
A contract will be discharged on the ground of supervening impossibility in the following cases:
1. Destruction of subject-matter:
When the subject-matter of a contract, subsequent to its formation, is destroyed, without the fault of the promisor or promisee, the contract is discharged. Note that it is so only when specific property or goods are destroyed which cannot be regained.
Illustrations:
(a) A music hall was agreed to be let out for a series of concerts on certain days. The hall was destroyed by fire before the date of the first concert. The plaintiff sued the defendant for damages for the breach of contract. It was held that the contract has become void and the defendant was not liable (Taylor vs Caldwell
(b) Similarly, if a factory premises on which machinery is to be installed are destroyed by fire, or a ship under a charter party is seized by a foreign government, the contract is discharged (Tatem Ltd. vs Gamboa).
2. Failure of ultimate purpose:
Where the ultimate purpose for which the contract was entered into fails, the contract is discharged, although there is no destruction of any property affected by the contract and the performance of the contract remains possible in literal sense. The leading case of Krell vs Henry is a good illustration on the point:
H hired a room in London from K with the object; as both parties well knew; of using the room to view the intended coronation procession of King Edward VII on a particular date.
By reason of the King’s illness the procession was postponed. H consequently could not use the room although he could go there and sit but with no purpose as there was no procession. K filed a suit for the recovery of rent.
It was held that H need not pay the rent as the contract was discharged on failure of the ultimate purpose or on postponement of the procession which was the foundation of the contract.
3. Death or Personal Incapacity of Promisor:
Where the performance of a contract depends upon the personal skill or qualification or the existence of a given person, the contract is discharged on the illness or incapacity or the death of that person.
Illustrations:
(a) A and B contract to marry each other. Before the time fixed for the marriage, A goes mad. The contract becomes void [Illustration (b) to Section 56],
(b) A contracts to act at a theatre for six months in consideration of a sum paid in advance by 5. On several occasions A is too ill to act. The contract to act on those occasions becomes void [Illustration (e) to Section 56].
(c) An artist undertook to paint a picture for a certain price, but before he could do so, he met with an accident and lost his right arm. Held, the artist was discharged due to disablement.
4. Change of law:
A subsequent change in law may render the contract illegal and in such cases the contract is deemed discharged. The law may actually forbid the doing of some act undertaken in the contract, or it may take from the control of the promisor something in respect of which he has contracted to act or not to act in a certain way
Illustrations:
(a) A sold to B 100 bags of wheat at Rs 700 per bag. But before delivery the Government rendered the sale and purchase of wheat by private traders illegal under the Defence of India Rules. The contract was discharged by impossibility created by subsequent change in law.
(b) There was a contract for the sale of the trees of a forest. Subsequently by an Act of Legislature, the forest was acquired by the State Government. The contract was discharged because it had become impossible of performance.
5. Outbreak of war:
All contracts entered into with an alien enemy during war are illegal and void ab-initio. Contracts entered into before the outbreak of war are suspended during the war and may be revived after the war is over provided they have not already become time-barred.
It may be noted that if war is declared between the countries of the contracting parties then only the contract is suspended during war.
If war is declared between the country of one of the parties to the contract and a third country, the contract remains binding, and if the party of the country now at war could not perform the contract because of dislocation of transport etc., it will be treated as “difficulty in performance” only and does not discharge the contract (Tsakiroglou & Co. Ltd. vs Noblee ThorP).
Cases not Covered by Supervening Impossibility:
“He that agrees to do an act must do it or pay damages for not doing it” is the general rule of the law of contract. Thus, unless the performance becomes absolutely impossible (as discussed above), a person is bound to perform any obligation which he has undertaken, and cannot claim to be excused by the mere fact that performance has subsequently become unexpectedly burdensome, more difficult or expensive. Some of the cases where impossibility of performance is not an excuse are as follows:
(i) Difficulty of performance:
Increased or unexpected difficulty and expense do not, as a rule, excuse from performance.
Illustrations:
(a) A, sold to B a certain quantity of Finnish birch timber. A, found it impossible to fulfil this contract because the outbreak of war disorganised the transport and A could not get any supply of timber from Finland.
Held, B was not concerned with the way in which A was going to get timber and, therefore, there was no frustration (Blackburn Bobbin Co. Ltd. vs Allen & Sons. Ltd), (b) X contracted with Y to send certain goods from Bombay to Delhi in September.
In August transport companies went on strike and transport was available at very high rates. Held, the increase in freight rates did not excuse performance (Karl Etlinger vs Chagandas & Co).
(ii) Commercial impossibility:
When in a transaction profits dwindle to a very low level or actual loss becomes certain, it is said that the performance of the contract has become commercially impossible.
Such a situation may arise on account of higher price of the raw material or increase in the wage bill etc. Commercial impossibility also does not discharge a contract. (Sachindra vs Gopal).
(iii) Impossibility due to the default of a third person:
The doctrine of supervening impossibility does not cover cases where the contract could not be performed because of the impossibility created by the failure of a third person on whose work the promisor relied.
Illustration:
A, a wholesaler, enters into a contract with B for the sale of certain goods ‘to be produced by Z’, a manufacturer of those goods. Z does not manufacture those goods. A is liable to B for damages. The words ‘to be produced by Z’ simply indicate quality of goods here,
(iv) Strikes and lock-outs:
A strike by the workmen or a lock-out by the employer also does not excuse performance because the former is manageable (as labour is available otherwise) and the latter is self-induced.
Where the impossibility is not absolute or where it is due to the default of the promisor himself, Section 56 would not apply. As such these events also do not discharge a contract.
Illustration:
The lessor of certain salt pans, failed to repair them according to the terms of the contract, on the ground of a strike of the workmen. Held, a strike by the workmen was not sufficient reason to excuse performance of the contract (Hari Laxman vs Secretary of State for India).
(v) Failure of one of the objects:
When a contract is entered into for several objects, the failure of one of them does not discharge the contract.
Illustration:
A company agreed to let out a boat to H, (a) for viewing a naval review on the occasion of the coronation of King Edward VII, and (b) to sail round the fleet. Due to illness of the King, the naval review was later cancelled but the fleet was assembled.
Held, the contract was not discharged because the holding of the review was not the sole basis of the contract. To sail round the fleet, which formed an equally basic object of the contract was still capable of attainment (H.B. Steamboat Co. vs Hutton.).
4. Discharge by Lapse of Time:
The Limitation Act lays down that in case of breach of a contract legal action should be taken within a specified period, called the period of limitation, otherwise the promisee is debarred from instituting a suit in a court of law and the contract stands discharged.
Thus in certain circumstances lapse of time may also discharge a contract. For example, the period of limitation for simple contracts is three years under the Limitation Act, and therefore on default by a debtor if the creditor does not file a suit of recovery against him within three years of default, the debt becomes time-barred on the expiry of three years and the creditor will be deprived of his remedy at law. This in effect implies discharge of contract.
Again, where “time is of essence in a contract,” if the contract is not performed at the fixed time, the contract comes to an end, and the party not at fault need not perform his obligation and may sue the other party for damages.
5. Discharge by Operation of Law:
A contract terminates by operation of law in the following cases:
(a) Death:
Where the contract is of a personal nature, the death of the promisor discharges the contract. In other contracts the rights and liabilities of the deceased person pass on to the legal representatives of the dead man.
(b) Insolvency:
A contract is discharged by the insolvency of one of the parties to it when an Insolvency Court passes an “order of discharge” exonerating the insolvent from liabilities on debts incurred prior to his adjudication.
(c) Merger:
Where an inferior right contract merges into a superior right contract, the former stands discharged automatically.
Illustrations:
(a) Where a man holding property under a contract of tenancy buys the property, his rights as a tenant are merged into the rights of ownership and the contract of tenancy stands discharged by operation of law. (b) Where a part-time lecturer is made full time lecturer, the contract of part-time lecturer ship is discharged by merger.
(d) Unauthorised material alteration:
A material alteration made in a written document or contract by one party without the consent of the other, will make the whole contract void.
Thus, where the amount of money to be received is altered, or an additional signature is forged, on a promissory note by a creditor, he cannot bring a suit on it and the pro-note cannot by enforced against the debtor even in its original shape.
The effect of making such an alteration is exactly the same as that of cancelling the contract (Gour Chunder vs Prasanna).
However, the document, though altered, can be used as proof of the transaction and the creditor may be allowed to claim refund of money actually advanced by him under Section 65 of the Contract Act which is based on the equitable doctrine of restitution. (Ananthrao vs Kandikanda).
6. Discharge by Breach of Contract:
Breach of contract by a party thereto is also a method of discharge of a contract, because “breach” also brings to an end the obligations created by a contract on the part of each of the parties.
Of course the aggrieved party, i.e., the party not at fault can sue for damages for breach of contract as per law; but the contract as such stands terminated.
Breach of contract may be of two kinds:
(1) Anticipatory breach; and (2) Actual breach.
1. Anticipatory breach:
An anticipatory breach of contract is a breach of contract occurring before the time fixed for performance has arrived. It may take place in two ways:
(a) Expressly by words spoken or written:
Here a party to the contract communicates to the other party, before the due date of performance, his intention not to perform it.
For example, A contracts with B to supply 100 bags of wheat for Rs. 60,000 on 1st March. On 15th February A informs B that he will not be supplying the wheat. There is express rejection of the contract.
(b) Impliedly by the conduct of one of the parties:
Here a party by his own voluntary act disables himself from performing the contract. For example, (i) a person contracts to sell a particular horse to another on 1st of June and before that date he sells the horse to somebody else; (ii) A agrees to marry B but before the agreed date of marriage she marries C.
In both the above cases there occurs an anticipatory breach of contract brought about by the conduct of one of the parties.
Section 39 of the Contract Act deals with anticipatory breach of contract and provides as follows: “When a party to a contract has refused to perform, or disabled him from performing, his promise in its entirety, the promisee may put an end to the contract, unless he has signified, by words or conduct, his acquiescence in its continuance.”
Effect of an anticipatory breach:
When there is an anticipatory breach of contract, the promisee is excused from performance or from further performance. Further, it gives an option to the promisee (i.e., the aggrieved party) whereby:
(i) He may either treat the contract as rescinded and sue the other party for damages for breach of contract immediately without waiting until the due date of performance, or
(ii) He may elect not to rescind but to treat the contract as still operative, and wait for the time of performance and then hold the other party responsible for the consequences of non-performance.
But in that case, he will keep the contract alive for the benefit of the other party as well as his own, and the guilty party, if he so decides on reconsideration, may still perform his part of the contract and can also take advantage of any supervening impossibility which may have the effect of discharging the contract.
Illustrations:
(a) A, agrees to employ 5 as a clerk, the service to commence from 1st June. On the 20th of May he informs B that his services will not be required. B is exonerated from his obligation under the contract and may at once sue A for damages for breach of contract without waiting until the time fixed for performance (Mersey Steel & Iron Co. vs Naylor).
(b) A, agrees to sell his house to B for Rs 8,50,000 on 1st of March. But on 10th February he changes his mind and writes to B that he will not be selling his house. There is an anticipatory breach of contract.
Two courses are open to B (i) he may treat the contract as rescinded and at once sue A for damages, or (ii) he may wait till 1st of March. B adopts the second course.
On 28th February the house is destroyed by fire. The contract stands discharged by supervening impossibility. A is entitled to take advantage of this supervening impossibility and B cannot recover any damages from him.
If the house did not catch fire, A could have taken back his letter of repudiation and asked B to take possession of the house on payment as per agreement.
2. Actual breach:
Actual breach may also discharge a contract. It occurs when a party fails to perform his obligation upon the date fixed for performance by the contract, as for example, where on the appointed day the seller does not deliver the goods or the buyer refuses to accept the delivery.
It is important to note that there can be no actual breach of contract by reason of non-performance so long as the time for performance has not yet arrived.
Actual breach entitles the party not in default to elect to treat the contract as discharged and to sue the party at fault for damages for breach of contract.